On August 4, 2022, a two-judge Bench of the Supreme Court in Kotak Mahindra Bank Limited v. Kew Precision Parts Private Limited considered the issue of limitation in connection with an application filed under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”).

Facts of the case:

Kotak Mahindra Bank Limited (“Financial Creditor”) had provided certain financial facilities to Kew Precision Parts Private Limited (“Corporate Debtor”) from 2013 onwards. The Corporate Debtor defaulted in making repayment of its dues to the Financial Creditor and therefore, the Financial Creditor declared the account of the Corporate Debtor as a non-performing asset (“NPA”) on September 30, 2015.

On November 19, 2017, the Financial Creditor issued a demand notice to the Corporate Debtor under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, (“SARFAESI Act”). On December 12, 2018, the Corporate Debtor admitted its liability to the financial creditor and offered a one-time settlement (“OTS”), which was revised on December 19, 2018 and December 20, 2018. The Financial Creditor and the Corporate Debtor finally agreed to a OTS to settle the outstanding dues at a lumpsum amount of Rs. 24,55,00,000 (Rupees twenty-four crore fifty five lakh) (“OTS Amount”) which was to be paid on or before December 31, 2018. The terms of the OTS were signed and executed by and between the Financial Creditor and the Corporate Debtor on December 20, 2018. 

The Corporate Debtor defaulted in the payment of the OTS Amount as agreed and the Financial Creditor filed an application under Section 7 of the IBC for initiation of a corporate insolvency resolution process (“CIRP”) against the Corporate Debtor. The application was admitted by the National Company Law Tribunal (“NCLT”) vide order dated September 6, 2019. The Corporate Debtor filed an appeal before the National Company Law Appellate Tribunal (“NCLAT”) contending that the petition filed by the Financial Creditor under Section 7 of the IBC was barred by limitation.

The Corporate Debtor contended that in this case, there was no acknowledgement of debt within 3 (three) years from the date on which the account of the Corporate Debtor was declared NPA, i.e., September 30, 2015. The Financial Creditor contended that the terms of the OTS were executed on December 20, 2018, whereby the Corporate Debtor acknowledged the liability and agreed to pay the OTS Amount and, therefore, the application under Section 7 of the IBC was filed within the limitation period. 

The NCLAT did not accept the contention of the Financial Creditor and proceeded on the basis that the application under Section 7 of the IBC was barred by limitation in the absence of an acknowledgment of debt within the period of limitation. Accordingly, the NCLAT set aside the CIRP initiated against the Corporate Debtor. 

Aggrieved by this order, the Financial Creditor filed an appeal before the Supreme Court. 

Observations of the Supreme Court:

The Supreme Court relied on Section 25 of the Indian Contract Act, 1872 (“Contract Act”) to hold that an agreement to pay a time barred debt would be enforceable in law, within a period of 3 (three) years from the due date of payment in terms of such agreement. Reference may be made to the following observations of the Supreme Court:

“31. Under Section 25(3), a debtor can enter into an agreement in writing, to pay the whole or part of a debt, which the creditor might have enforced, but for the limitation of a suit in law. A written promise to pay the barred debt is a valid contract. Such a promise constitutes novation and can form the basis of a suit independent of the original debt.” (emphasis supplied)

Further, the Supreme Court made a categorical distinction between an acknowledgment made under Section 18 of the Limitation Act, 1963 and a promise within the meaning of Section 25 of the Contract Act. In this regard, the Supreme Court observed as follows:

“33. Both promise and acknowledgment in writing, signed by a party or its agent authorised in that behalf, have the effect of creating a fresh starting of limitation. The difference is that an acknowledgment under Section 18 of the Limitation Act has to be made within the period of limitation and need not be accompanied by any promise to pay. If an acknowledgment shows existence of jural relationship, it may extend limitation even though there may be a denial to pay. On the other hand, Section 25(3) is only attracted when there is an express promise to pay a debt that is time barred or any part thereof.” (emphasis supplied)

The Supreme Court further relied on Section 7(5)(b) of the IBC to observe that before rejecting an application under Section 7 of the IBC, the NCLT is required to notify the applicant and provide the applicant a period of 7 (seven) days to rectify the defects in the application. In the present case, the NCLAT set aside the CIRP initiated against the Corporate Debtor without giving the Financial Creditor an opportunity to rectify the defects as envisaged in Section 7(5)(b) of the IBC. Accordingly, the Supreme Court held as follows:

“69. The Appellate Tribunal (NCLAT) did not, therefore, have the occasion to consider whether Section 25(3) of the Contract Act would be attracted. The Appellate Tribunal (NCLAT), as observed above, proceeded on the basis that the CIRP proceedings were barred by limitation in the absence of any acknowledgement of debt within the period of limitation, and closed the CIRP proceedings in the NCLT, without considering the question of applicability of Section 5 of the Limitation Act for condonation of delay, to proceedings under Section 7 of the IBC.

70. This Court is of the view that the Appellate Tribunal (NCLAT erred in closing the CIRP proceedings without giving the Appellant Financial Creditor the opportunity to explain if there was sufficient cause for the delay in approaching the NCLT. An appeal being the continuation of original proceedings, the provision of Section 7(5)(b) of the IBC, of notifying the Financial Creditor before rejection of a claim, would be attracted.” (emphasis supplied)

Accordingly, the Supreme Court allowed the appeal and directed the NCLT to consider the application for initiation of CIRP against the Corporate Debtor afresh.

Please find a copy of the judgment, here.

This update has been contributed by Aastha (Partner) and Dileep Krishnan (Associate).

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